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Italian voters dropped a political bombshell on the rest of Europe last week, undermining confidence and reminding investors that the euro-zone financial crisis is far from over.

As if such a reminder were needed.

The election to choose a new government to steer the country through the next phase of rebuilding in the euro-zone's third-largest economy delivered one of the most unwelcome outcomes: stalemate. No party secured enough support to govern alone, and the spread of votes across the political spectrum makes a strong coalition improbable. Even if parties find enough common ground on specific issues to form a government, it would be fractious and probably short-lived. Fresh elections can't be far off.

Recalling last summer's debacle over elections in Greece, it was a case of déjà vu for investors. Italian stocks tumbled -- falling 4.9% on Tuesday, the first full day of trading after the results -- before retracing some ground and ending the week down 3.4%. The benchmark FTSE MIB closed Friday at 15,675, down 3.7% since the start of 2013 and 9.3% off its 52-week high. The yield on Italy's 10-year government bonds climbed to 4.78%, from 4.44% before the vote. The upheaval rippled through markets around the world.

Despite the political paralysis, calm returned quickly. That's because for all its problems, Italy isn't Greece. And the landscape in Europe has changed dramatically in the past nine months. While sentiment in Europe has taken a knock, containment is a real possibility.

The European Central Bank in September established a mechanism that should prevent the cross-border spread of financial turmoil. It means that disruption like that in Italy is manageable, in theory. There are also moves in Brussels toward a closer fiscal and banking union, which should increase stability. That should be reassuring for investors. Italy's troubles do nothing to alter the European outlook or the fact that stock valuations in the region are relatively attractive, says Xavier Denis, chief economist at Société Générale Private Banking in Paris. "We are still pretty much positive on euro-zone equities," he says.

Perhaps the biggest threat from Italy's political paralysis is that a period of uncertainty will hurt Europe's growth prospects. Two years of recession should end in the middle of 2013. The euro zone desperately needs positive economic growth to get out of the hole it's in, so it must avoid a relapse. An interest-rate cut could come sooner, rather than later. "It is so much easier to solve problems when your economy is growing at 1% or 2% a year, rather than not growing at all," says Jens Larsen, chief European economist at RBC Capital Markets in London.

Italian Premier Mario Monti has set Italy on the road to competitiveness with tax, pension, and labor reforms that would have been unpalatable for an elected leader. There is still a lot of work to do: Italy's debt is 127% of gross domestic product, and its unemployment rate is about 11%. However, like other European leaders, Monti failed to strike a balance between austerity and growth, which cost him at the ballot box.

In time, Italy might be more appreciative of Monti's contribution. But the prospect of fresh votes is a worry for Italy and Europe because the anti-austerity Five-Star Movement has momentum with an electorate tired of belt-tightening policies. Led by Beppe Grillo, an ex-comedian prevented from running for office due to a criminal conviction, the Five-Star Movement won a better-than-expected 25% of the vote. Grillo has rejected talk of a coalition.

The results could open the door for a grand coalition between the center-left Democratic Party of Pier Luigi Bersani and center-right parties led by ex-Prime Minister Silvio Berlusconi, but there are numerous complexities to be resolved before that can happen. It might not be the best thing for Italy, but it's hard to say exactly what is.

ROYALTY PHARMA'S TENTATIVE approach to Irish biotech company
Elan
looks opportunistic and doomed to fail. The investment firm's indicative proposal offers a premium of a paltry 6.3% to Elan's American depositary receipts (ticker: ELN). The ADRs have since surged above the price that Royalty had hoped to pay, a sign that investors expect more.

The ADRs closed Friday at $11.46, compared with the indicative bid of $11. Elan is pocketing $3.25 billion from
Biogen IdecBIIB -0.7215180740277544%Biogen Idec Inc.U.S.: NasdaqUSD412.79
-3-0.7215180740277544%
/Date(1425420000298-0600)/
Volume (Delayed 15m)
:
1206500AFTER HOURSUSD412.2
0.0699999999999932-0.14292981903631385%
Volume (Delayed 15m)
:
29367
P/E Ratio
33.20917135961384Market Cap
97550156404.9353
Dividend Yield
N/ARev. per Employee
1284310More quote details and news »BIIBinYour ValueYour ChangeShort position
(BIIB) in exchange for turning over its rights to multiple sclerosis drug Tysabri and instead accepting a royalty on the product's sales. Out of that, $1 billion will be used to buy back stock. Investors may want to see what else Elan has planned. Some analysts reckon that Elan is worth $13 or $14 a share. Royalty Pharma will have to raise its bid by a princely sum if it wants to move forward.